The Internal Revenue Service (IRS) has a well-established process for revoking the tax-exempt status of nonprofit organizations. This process involves individual audits and opportunities for organizations to defend themselves. President Trump recently called for the revocation of 501c3 tax-exempt status for certain nonprofits.
This announcement has raised concerns, especially among environmental groups who fear new regulations may target conservation and climate nonprofits. However, the president, Justice Department, Treasury Department, and IRS do not have the authority to revoke tax-exempt status through an executive order alone. The IRS must conduct individual audits, and nonprofits can appeal adverse rulings.
The IRS audit process can be extensive. It typically involves correspondence or field examinations. At the end of an audit, there are four potential outcomes: a no-change letter, a no-change letter with advisories, a negotiated agreement, or a proposed revocation of tax-exempt status.
Trump’s push for nonprofit scrutiny
If an audit results in a proposed revocation, the entity has 30 days to contest the decision and engage in the IRS appeals process. The nonprofit remains tax-exempt during this process.
If the revocation is upheld after appeals, the organization may seek a declaratory judgment from the US Tax Court or other federal courts. There are further appellate options if the initial court decision is unfavorable. Even if an organization loses its tax-exempt status, it continues as a private nonprofit corporation.
It must file IRS Form 1120 and pay taxes on net income. Organizations may adjust their operations to requalify for tax-exempt status or transfer assets to a compliant 501c3 entity and then dissolve. Senior executive branch officials, including the president, are prohibited by law from requesting that the IRS commence or terminate an audit of any taxpayer, barring specific exceptions.
Legislative actions by Congress, while possible, have not been proposed. While the recent statements have caused significant unrest, the statutory processes ensure a fair and thorough review system to protect the integrity of the nonprofit sector.